No Section 40A(2) Disallowance Without Examining Qualification, Experience, and Work Profile of Related Parties | HC

Case Details: Mehra Jewel Palace (P.) Ltd. v. Principal Commissioner of Income-tax - [2023] 155 taxmann.com 270 (Delhi)

Judiciary and Counsel Details

• • Girish Kathpalia & Rajiv Shakdher, JJ.
  • Salil Aggarwal, Sr. Adv., Madhur Aggarwal & Uma Shankar, Advs. for the Appellant.
  • Sunil Agarwal, Sr. Standing Counsel, Shivansh Pandya, Standing Counsel & Utkarsh Tiwari, Adv. for the Respondent.

Facts of the Case

During the year under consideration, the assessee paid salaries to its relatives specified under Section 40A(2). Meanwhile, in the assessment proceedings, the AO called upon the assessee to justify the payments made to specified persons. Unsatisfied with the explanation, AO made additions to the income of the assessee.

The matter reached the Delhi High Court.

High Court Held

The High Court held that the assessee tried to justify the payment of salaries to the persons concerned. No evidence at all was adduced before any of the authorities by the assessee regarding the educational qualification, experience, and work profile of any of the persons concerned, which could be taken as their contribution to the growth of the business of the assessee.

The provision under Section 40A(2)(a) of the Act clearly shows that before recording disallowance, AO has to form an opinion regarding the legitimate needs of the business or benefit derived or even what would be the fair payment outgo for services rendered. Such an opinion cannot be arrived at without adducing necessary evidence. Thus, AO was duty-bound to provide an opportunity for the assessee to place on record the requisite evidence to justify its claim.

But all that the AO did was to ask the assessee to justify the salaries paid and, without seeking relevant evidence, simply rejected the claim.

Therefore, the assessee must be granted an opportunity to adduce appropriate evidence, documentary or otherwise, before the AO to establish its claim regarding educational qualification, experience, work profile, and, in particular, the duties discharged by the concerned persons to justify the claim of the assessee with respect to payment of salary to the persons concerned.